The 'News-onomics' of Tablets Replacing Newspapers

Ready to trade up? That’s the new question now moving to the forefront of news publishers’ longer-range strategic planning, as the real tablet revolution seems to be upon us. The Consumer Electronics Showis shining a bright light on The Year of the Tablet. Tablet sales are projectedto reach 70 million in the U.S. in 2011 and 2012 (50 million of them iPads). Early survey results, such as the Reynolds Journalism Institute’s study, are showing longer news session times, more-than-snippets-reading, and a renewal of lean-back, pleasurable longer-form reading. Publishers have been edging into an age of news reading renewal.

Maybe, people dowant to read news and watch news after all, and maybe branded news can find its mojo once again. Then, as soon as the euphoria of they-really-like-us-after-all subsides, questions uncomfortably follow. The big one: Where will the minutes spent reading news on the tablet come from? Early evidence suggests they will come both from print and from desktops, laptops, and smartphones. One certainty, they have to come from someplace; multi-tasking isn’t endless.

So, publishers are just beginning to ask themselves, what if news consumers like these tablets so much and so quickly (maybe even taking them to bed, forsaking the soon-to-be-jilted smartphone) that print readers flee from musty, old newsprint even more quickly than they have over the last difficult decade? What if newspaperreaders, clearly pivotal early adopters of the iPad, decide they really don’t need the paper anymore. What if they decide that they’ve got the paper, in almost-paper-like form right in front of them, more environmentally friendly and it is updated throughout the day?

That’s when the euphoria can turn to sudden dread. It’s great that readers want — and may pay for — news on the tablet, but if they flee print more quickly, how will that play havoc with the business model of news and magazine publishing? Today, entering 2011, no U.S. news company makes more than 16 percent of its total revenues from digital. All depend upon print for 84 percent or more of their journalist-paying income. They’ve been transitioning, and transitioning, and transitioning — yet they’re only one-fifth of their way into it by the metric that matters most.

A few companies are now laying new strategy, based on private projections. They are forecasting that 20-25 percent of their print readers will migrate to the tablet within five years. (Remember, at the forecast rates, one in five Americans would have a tablet by 2014.) All admit that it’s guesswork at this point. Yet we see in their early reader pricing the acknowledgment that the real print-to-digital transition might be finally be upon us. They don’t want to miss thisship when it sails, as they have too many others.

So they are beginning to anticipate that question: What if readers trade up? Or what if they trade over, moving from one reading experience, print in morning, smartphone on the go, desktop at work, tablet in the evening?

Let me suggest that as the newsonomics of tablets-replacing-newspapers gets serious, there are three big numbers to watch. These three numbers are the drivers that will separate out the winners from the losers, come 2015, when daily print is confirmed as a waning niche choice and digital news consumption is our way of life. They tell how us how much revenue news companies can generate and how much it costs them to produce, market, and distribute these mainly digital products. They seek to meet two simple goals: Take in enough revenue to afford a significant professional news staff, and produce a stable profit. Given how the industry flirted with unprofitability in 2009, even a stable 10 percent profit margin would be welcome and one to build on in the years to follow. The three numbers:

The Journal’s new pitch says it’ll just give you one price ($2.69 per week for first 52 weeks), and you can get the Journal by paper, tablet, online and smartphone. That’s the most prominent offer; also offered are the “Print Journal” $2.29 per week and “Online Journal” at $1.99 per week. The idea: Why mess around with less than a dollar a week, when you can just say “yes” and read it whenever, wherever you want.

The big play here is getting readers conditioned to paying for digital access. The big side benefit is that fewer people may terminate their print subscriptions (in the short term) because they are just paying once for access across all product types. While digital subscription revenue is the big key here to reestablishing two revenue streams for news publishers, one-off sales will become increasingly lucrative. “Single-copy” becomes less about buying a single day’s paper and more about buying a selection of content from that brand (and increasingly aggregated, multi-brand news products), special sports and features products tailored to individual interests.

Advertising pricing: This is the huge question mark. Early tablet adopters — the Journal, the Times, the FT, The Economist, Reuters — reaped outsized rewards in advertising in 2010. These early advertisers didn’t worry about effective CPM rates, or trackability; they knew they were buying into being first and prominent in the hot medium of the year. They have paid effective CPMs of more than $100, without blinking, or 10 times or more what they pay these same newspaper sites to advertise on desktop or laptop editions. Yet the raging ad revolution will come to tablets through pay-for-performance, highly personalized direct marketing, social marketing and geo-located couponing, among other innovations, as the platform becomes mainstream. Inevitably, rates will fall — but how far, how fast and to what level of stability?

Will money go disproportionately to single-brand products, as they did in 2010, or will the Flipboards, Facebooks, Instapapers, and first-in-aggregation winners (Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT), and AOL (NYSE:AOL)) find ways to grab a big portion of the ad revenue as they’ve done with online advertising so far? Where will the big marketing-services move fit it on the tablet, as local publishers increasingly sell a range of digital marketing choices to local small and medium small businesses? How will the privacy battles play out on the tablet, arguably the most personal of digital experiences. Will it limit a little or a lot of publishers’ ability to market to these customers?

What we’ll be looking here is for some new evolving metrics. In the old world, print newspapers took in $600-plus, annually, per unit of circulation. Of course, online, that number is less than a tenth. Although that’s really been a bogus comparison because an online visitor doesn’t compare to print subscriber in brand identification or likely usage over time. Still, news brands in the digital age will inevitably find a strong smaller core of loyal readers (who may pay them and, as importantly, read them often) and a larger group of occasional search- and social-driven users who are less 'revenue-vital'. How much per-year digital news brands can drive per loyal reader and per occasional reader will tell us a lot about how big a journalistic staff they can support.

Costs: If most revenues are digital then most costs should transition as well-- sooner rather than later. As we said above, most revenues still come from print. So print media, newspaper and magazines have found themselves in the awkward positioning of supporting two business models; one dying, one being born fitfully. The results have been painful. So if the enterprise becomes mainly digital, then major cost reductions are in order. Most publishers find it near impossible to disentangle their businesses right now, but they’ll also tell you that 60 percent or more of their costs are tied up in Old Metal, Old Trucks, Old Offices.

Flash forward to what we might call The Patch Age of fewer office buildings, mobile journalists, and none of the hard costs of early 20th-century manufacturing and trucking: You’ve cut out lots of costs. Of course, for news publishers still maintaining a print business (and print should remain a lucrative niche, if done right), these costs can’t be eliminated. They can, though, be largely segregated from the digital business. As they’re segregated and reduced, cost structures become much more reasonable to manage.

Add up the three numbers, and we have the glimmer of sustainable, new digital-mainly news models — ones as applicable in many ways to the Bay Citizens and Texas Tribunes as to The New York Times or The Miami Herald. The revenues may not ever match 2005 levels for many publishers. But if costs can be cut substantially, new profitability and sustainability can be found. Then 2011 will be the early clay in which those models take shape.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.